Monday, March 12, 2012

China’s Real Estate Spirals Downward

By Gao Zitan
Epoch Times Staff

China’s real estate (RE) market is in a downward spiral. A big drop of 30-50 percent this year is not impossible, according to a Chinese economist.

According to data presented by China’s National Bureau of Statistics in January 2012, the overall price of RE in China’s 70 largest and mid-sized cities has dropped four months in a row.
“With the central Communist Party continuing its control policy, and local governments’ attempt of loosening control, where is China’s real estate market heading, and why are prices dropping?” The Epoch Times asked Dr. Jian Tianlun, a former employee at People’s Bank of China and currently an economist in the U.S.

Jian said China’s real estate market has shown clear signs of change since last October. Home prices in more and more cities are dropping. Looking at January’s figures, 48 out of the 70 largest and mid-sized cities have experienced price drops, 22 have remained the same. Overall, RE prices keep dropping, Jian said.

Actually, the change in China’s RE market began much earlier, he said. Sales began decreasing in the middle of last year. It’s just that prices did not drop much at that time. If we trace further back, land prices started declining one or two years prior to the housing decline.

Predicting the near future of China’s RE market, Jian said, most people believe it will continue to drop. How much prices will drop this year may vary significantly in different parts of the country. Overall, Jian predicted a drop of 10-20 percent, with certain places possibly remaining stable and other places doing worse.
“A big drop of 30-50 percent is not impossible,” Jian said.


Prices Simply Way Too High

Last year the regime imposed lending controls and purchase limits in an effort to cool down China’s overheated RE market and to control a growing bubble. But according to Jian, the controls did not have much to do with the sudden price slowdown, since land prices were already dropping two years prior, indicating that home prices would also come down.

“The [regime’s] policy may have had a little bit of influence on prices, but it could not turn the market around,” Jian said.
Furthermore, Jian said he considers the central government’s control policy as “twisted” and unsuitable. “It may have only had a little short-term effect in cracking down on speculation,” he added.
The reason for prices dropping, according to Jian, is that China’s RE market is simply overpriced and unsustainable. In many places, home prices are more than 30 times an average family’s annual income. In the U.S. it’s only five to eight times.

China’s home prices are much higher than those in the U.S., but Chinese people’s average income is only one ninth of Americans’ income. According to statistics by the International Monetary Fund, China’s 2011 per capita GDP was US$5,184, while the U.S. per capita GDP was US$48,147.


Economic Downturn

Several factors have contributed to the high RE prices, Jian said. One is that Chinese people don’t have a lot of choice when it comes to investing their money, so their investments have become overly speculative and risky. But basically, it was deviant government policies a few years ago that led to the RE bubble, he said.

Now, the economic downturn is one of the reasons for the bubble bursting, Jian said. Europe, one of China’s largest export markets, is in a deep crisis. The economies in other developed countries are not good either.

“When the global economy is shaky, it is impossible for China to depend on exports to keep up its own economy,” Jian said.
It is also not possible for China to rely on infrastructure investment to move its economy forward. China is already over-invested, and already has too many ghost towns and ghost buildings, he said. In the past, investment made up 40 to 50 percent of China’s GDP. There is no way to keep such growth going.

“In the real estate market, everyone has seen the bubble, and hence investment in real estate is slowing down. With all kinds of social conflicts, anything could trigger a real estate crash,” Jian said.


State Monopoly on Land

But the fundamental cause of the housing market being in a mess is the regime’s macroeconomics, specifically the regime’s ownership and control of land, according to Jian.

The government monopolizes land. Land is limited and can only be sold at auctions. This means there is always intense competition among the buyers—namely the developers—while there is absolutely no competition on the sellers’ side. As such, government auctions make land prices go up higher and higher, Jian said.

“Two years ago land prices started to fall. It meant that developers were holding too many parcels of land, and land prices were too high. When they saw that they did not make much profit from selling the houses on that land, the demand for land decreased, and as a result the price of land then started to fall,” Jian explained.


Wealth Gap

Another factor that has driven up China’s RE market are the many rich people, generally officials with opportunities to enrich themselves, and people with ties to officials and state-owned enterprises. No matter how high home prices climb, this segment of society will keep buying houses.

“Multimillionaires, such as coal mine owners in Shanxi Province and Inner Mongolia, have so much money that they can afford to buy dozens or even over 100 houses in one city and leave them empty as investments,” Jian said.

For the majority of Chinese, however, home prices are way out of range, he said. For a person with a masters or a Ph.D. degree, who just starts working, buying a home is unattainable; he may not be able to afford one in 20 or 30 years. It is even more so for blue-collar workers and peasants; buying a house is impossible for them.

Homeowners in Beijing or Shanghai may have heating costs of 1,500 to 2,000 yuan (US$236-315) per month during winter. It is nothing to the rich, but for common people, it’s their entire monthly salary.

When the rich kept buying houses regardless of the cost, prices kept going up, and seeing that, other people would also buy, thinking they could make money. But prices cannot increase indefinitely this way, Jian said.

To solve the RE problem, economic policies need to be changed, and efforts must be made to shrink the poverty gap. Limiting the number of per person house purchases is not the solution, and relying so much on infrastructure investment for the growth of GDP is also not a solution, Jian said.